U.S. Inflation Subsides, Labour Market Still Going Strong
EUR/USD Pushes Higher, Overbought RSI Comes Into Play.
Last week’s PCE Price Index showed that inflation in the U.S. is starting to recede, which weakened the greenback and allowed its counterparts to climb. However, Friday’s NFP exceeded expectations, and so did the Average Hourly Earnings.
The Fed signalled that a shift in monetary policy is imminent but if the labour market continues to swell, then wage growth may hinder the fight against inflation. Despite a stronger-than-expected NFP, traders looked past the data and the Dollar Index (DXY) continued to slide lower, currently trading at the lowest it’s been since June.
With a very light economic calendar this week, it’s likely that the market direction will be mostly determined by the technical side. Still, a few notable releases could make a difference, so let’s give them a look.
Key Data for the Week Ahead
Monday at 3:00 pm GMT the ISM Services PMI comes out, expected to show a reading of 53.5, while the previous was 54.4. This survey of purchasing managers acts as a leading indicator of economic health focused on the Services sector. It is marked as “high-importance” on most economic calendars but in reality, its impact is big only if the actual number differs a lot from the forecast.
ECB President Christine Lagarde will speak Thursday at 12:00 pm GMT at a virtual conference organized by the European Systemic Risk Board. She will deliver pre-recorded opening remarks, without interaction with the audience, thus the impact may be low.
Friday at 1:30 pm GMT the U.S. Producer Price Index (PPI) and Core version of the indicator will be released, followed at 3:00 pm GMT by the Prelim UoM Consumer Sentiment survey. The PPI has some inflationary implications because a higher price charged by the producer will be eventually paid by the consumer. On the other hand, the Consumer Sentiment survey is a leading indicator of consumer spending.
Technical Outlook – EUR/USD
EUR/USD continued its climb despite the NFP surpassing the forecast and the pair is currently trading at 1.0550, a price last seen in June of this year.
The extended climb has created a bearish divergence (the price is making higher highs while the RSI is just bouncing on its overbought level) and the pair is approaching the resistance at 1.0635 as well as the top Bollinger Band.
The factors above increase the probability of a move down in the form of a retracement. The first notable support is now 1.0350 (the previous resistance), which almost coincides with the middle of the Bollinger Bands. This potential move down may start even before resistance (1.0635) is touched.
